Thank You

Error.

Stock mutual funds have been hard-hit this year, but the past week delivered even worse news. Investors pulled more than $4 billion out of U.S. stock funds in the week ended Thursday, the highest weekly outflow in a year that has seen $71.4 billion in net outflows so far.

But some mutual funds have suffered more than others. I asked Morningstar to provide a list of funds that had lost more than half of their assets—from withdrawals or poor performance—this year alone. There were 22. Expanding the screen to include funds that had lost more than 40% of their assets adds another 30 names.

High—even unusually high—outflows aren't necessarily a death knell for the fund, but it rarely indicates good news for investors. The best-case scenario is that the fund's focus was in a sector or style that became hot, and attracted an abundance of inflows that has since moved on. But that doesn't usually lead to even a 20% drop in assets. Sometimes it can mean a fund lost a big institutional investor, or got kicked off a 401(k) plan. Other times it can indicate a problem with management. No matter what the reason, a dramatic drop in assets in a short time is problematic for investors.

For starters, fund managers are paid to pick stocks to buy—but when they need to raise cash to meet redemptions, managers become more focused on which stocks they can sell. "That can distract them from finding new ideas," says Morningstar analyst Michelle Canavan. "And they end up spending more time meeting with investors and pacifying their client base." Not only is all that a diversion from their main duty, but it's also particularly problematic for funds that invest in smaller or otherwise less liquid stocks: The funds are often forced to sell before they want, and big selling can push down the share price. What's more, all that trading can raise the fund's transaction costs, which don't show up as a separate fee, but definitely eat away at returns.

Lower assets also mean lower revenues for the fund and fund company, which can ultimately lead to problems for the investor, says Adam Bold, founder of the Mutual Fund Store, an advisory firm that manages $7 billion. "If assets are down 40%, then their revenues are down 40%, and their margins aren't that big to begin with," Bold says. "The fund firms may have to cut expenses, and the managers may end up traveling less and using more outside research. It can affect everything from the fund's timeliness of stock trades to the manager's ability to interact with companies."

Another sneaking cost of heavy outflows: Higher annual expenses. New or smaller funds generally have a "break-even" point, where expenses drop as assets rise. But when assets fall, they can fall below that level and cause the fund to raise fees. Fund companies can waive those fees...but that doesn't mean they do.

Case in point:
Oppenheimer Commodity Strategy Total Return
(ticker: QRAAX). Longtime manager Kevin Baum left abruptly in April. The firm promoted Robert Baker, who had been Baum's co-manager on the fund since 2007, but performance has suffered for years, and there's no turnaround in sight. The fund is down 3.3% so far this year, putting it in the bottom of its category, behind 84% of its peers. Assets have dropped 46%, to $640 million at the end of October from $1.2 billion at the beginning of the year. As a result, the fund's fees have gone up to 1.4% from 1.2%.

A dramatic management change and lack of a succession plan also plagued Nuveen Investments. The fund company is still best-known for its top-notch municipal-bond management (and perhaps its 2000 Super Bowl commercial that depicted Christopher Reeve "walking"), but its equity-oriented Tradewinds affiliate had a rough year. Three funds saw massive outflows:
Nuveen Tradewinds Global All-Cap
(NWGAX) and
Nuveen Tradewinds Value Opportunities
(NVOAX) both saw assets shrink to about a quarter of what they were at the beginning of the year, and
Nuveen Tradewinds International Value
(NAIGX) saw assets fall 63%. Dave Iben, Tradewinds' chief investment officer and lead portfolio manager on those funds, left in early March. "The vast majority of those outflows expectedly took place in March, April, and May, and leveled off substantially from that period," said Kathleen Cardoza, a spokesperson for Nuveen. Those three funds lost almost $4.4 billion to outflows this year, which could present some challenges for Tradewinds, which manages $10.3 billion, but not much of an issue for parent Nuveen, which oversees $220 billion.

Heavy outflows are more damaging to smaller fund shops, like Artio, whose
Artio International Equity I
(BJBIX) and
Artio International Equity II
(JETAX) saw assets fall by 55% and 70%, respectively. That amounted to more than $5.7 billion in net outflows, a big hit to the now $16.7 billion firm.

The bottom line for investors, says Bold: If your fund has seen assets shrink more than 20%, get out. "A big drop in assets is always precipitated by poor performance," Bold says. "Investors don't yank their money out when things are going well."